Debt, Retirement, Investing in a Bear Market
The average family with credit card debt shells out more than $1,000 a year in interest payments, according to CardWeb.com, an online credit card research group. The average credit card debt climbed to nearly $8,500 by the middle of the year85 percent of which is gathering interest at an average of 15 percent annually, CardWeb estimates. By contrast, credit card debt per household averaged less than $6,000 in 1995 and less than $3,000 in 1990.
Tired of losing money in the stock market, many wealthy investors are trying their luck with hedge funds, which aren't regulated by the Securities and Exchange Commission and so are free to make riskyalbeit lucrativeinvestments. During the second quarter of this year, these funds attracted a record $8.4 billionmore than in all of 2000, according to Tremont TASS Limited, an investment services company.
Through July, US and overseas hedge funds gained 2.9 and 2.2 percent, respectively, while the Dow Jones Industrial Average, the Standard & Poor's 500 Stock Index, and the Nasdaq Composite lost 1.6, 7.6, and 17.8 percent, according to VAN Hedge Fund Advisors International, a hedge fund investment organization. In the same period, the average equity mutual fund declined 9.5 percent.
When the market slips, actively managed mutual funds don't always beat out funds that track indexes, according to a new study. In fact, more than half of the times that the stock market has declined since 1986, index funds outperformed the managed funds, reports the Schwab Center for Investment Research, which studied more than 120 large-cap index funds and more than 2,100 actively managed large-cap equity funds. The study may dispel a common belief that managed funds do better in troubled times because portfolio managers have the flexibility to rearrange holdings.
Index funds, which simply buy whatever stocks are on an index such as the S&P 500, have an average expense ratio of 0.62 percent, compared with 1.40 percent for the average actively managed fund, according to the study. For $10,000 invested over 10 years at an average annual return of 10 percent, the difference in expenses would almost exceed $1,700.
A new kind of IRA that promises to let some people hand down millions of dollars to their grandchildren is founded on assumptions that may not hold water, warns NASD Regulation Investor Alert. "Stretch" IRAs, based on recent IRS rule changes, permit you to let your account accumulate tax-deferred earnings even after you die, so that the assets can be passed down several generations.
But the huge payoffs promised in some sales presentations are unrealistic, according to NASD. The figures assume that your primary beneficiaries, usually your children, will die before reaching their full life expectancy, allowing your secondary beneficiaries, usually your grandchildren, to get the proceeds. Stretch IRAs also assume you won't need the money for your own retirement, and that you'll withdraw the smallest amount allowed by law, no earlier than age 70 1/2.
In addition, they make unlikely assumptions about the economy: that tax laws won't change, that inflation will be nonexistent, and that the rate of return on the underlying investment will remain constant.
While 401(k) account balances have declined recently for older investors, young workers have continued to witness increases, according to the Investment Company Institute, a mutual fund industry trade group, and the Employee Benefit Research Institute, a nonprofit research organization. That's because employee contributions have been sufficient to compensate for market declines in the relatively small accounts of young workers. In older employees' larger accounts, however, allowable contributions aren't enough to offset the typically bigger losses.
The small decline in overall balances is the first time the average 401(k) account has lost money since EBRI started tracking account balances in 1995.
Yvonne Wollenberg. Financial Beat. Medical Economics 2001;20:11.